Amid concerns of a possible global slowdown, continuing trade disputes, and never-ending Brexit uncertainty, Jupiter Merlin’s David Lewis said the team has grown more protective and adopted a ‘watch-and-react’ stance.
Lewis said the Jupiter Merlin multi-manager team – which also includes John Chatfeild-Roberts, Algy Smith-Maxwell, and Amanda Sillars – is keeping an eye on several developments that could have the potential to nudge their positioning in a more cautious direction.
He said: “There are numerous factors which we are watching which have the potential to result in us moving our positioning in a more cautious direction.
“These include the trade frictions between the US and China which have the potential to be a destabilising force for markets and increase costs for producers and consumers.”
He added: “Brexit is another which has the potential to produce political and economic instability for a period of time.”
In addition, Lewis said the team has become increasingly concerned about a broad slowing of growth globally, be that driven by a cyclical downturn in consumer sentiment or on the back of tighter monetary policy.
Corporate earnings would also directly impact markets, he added, were these to sour materially.
Performance of MSCI World index over 15yrs in US dollar
Source: FE Analytics
Indeed, Lewis noted that the current economic cycle, which began in Q1 of 2009, as the chart above shows, has had a long expansion in historical context.
“Having said that,” he added, “cycles do not die of old age and so we are watching leading economic indicators closely to identify areas of frailty that could lead to economic deterioration.”
The co-manager noted, however, that his team’s adjustment is by no means a 180-degree pivot, adding: “We have not become dramatically more defensive over recent months but have instead moved more cautious at the margin over the last 12 months or so, as we have seen more pronounced periods of market downside.”
Yet, rather than trying to make medium-term forecasts, the team focus instead on monitoring data and market performance on a daily basis.
“We look to react to data and inflection points as they appear and positions our portfolios in a prudent manner accordingly in order to maximise performance for the given level of risk we are willing to embrace, dependant on the relevant strategy,” Lewis said.
As such, the manager said the Jupiter Merlin team members stand ready to change their minds and alter their positioning accordingly.
“This [flexibility] provides us with the ability to increase or decrease risk within our portfolios actively in accordance with how we believe the market conditions will develop,” he explained.
For the time being, though, the team continues to implement its cautious approach in a number of ways.
“One of the ways we have done this is to modestly reduce our exposure to equities,” he said. “Other ways include biasing our portfolios to funds which, in terms of their style, can be characterised as more quality-growth orientated, which tend to outperform when macro-economic data deteriorates.
“A final way is to ensure that our portfolios have a material exposure to US dollar assets, which can benefit from the safe-haven status of the world reserve currency.”
Lewis said the team tends to have some structural biases to the way it runs its portfolios, which can help to mitigate losses during more challenging market environments.
“One factor which we believe contributes to this is our focus on active managers who tend to like to find companies with strong balance sheets and fundamentals. In tougher market conditions, this fundamental strength often helps to bolster performance,” he said.
“Furthermore, a number of the underlying strategies which we invest into will hold cash when they cannot see compelling opportunities, which reduces their market sensitivity during downdrafts.
“Finally, we have for some years now, held a physical gold ETF [exchange-traded fund] in our portfolios which can often perform in an inverse way to risk assets, helping to hedge our portfolios somewhat.”
Given the number of challenges facing markets, Lewis said it is important that investors take action to protect themselves.
“We would always advocate investing in managers who you deem to have a margin of safety in what they do, through the strategy they employ and the resulting companies that they invest into,” said the manager.
“Furthermore, diversification is vital during uncertain times and it is something we look to embrace across the Jupiter Merlin portfolios.
“Finally, for those committing capital to risk assets, being aware of the amount of risk one is taking and also having a long-term time horizon, are both vital in a world where market returns can be very dramatic to the up and down side in any particular year.”
Lewis said the Jupiter Merlin Real Return fund is particularly well suited to handle any potential market downturn, given its absolute return approach to investing.
The fund aims to produce a return of 3 per cent above inflation per annum over rolling three-year period and grow investor assets in real terms.
Lewis said the fund does this by investing the core of the portfolio into a blend of long/shot equity absolute return managers, across a range of strategies with the aim of producing compound annual gains by taking varying levels of risk.
“Besides these absolute return managers, we will hold some dedicated long-only equity managers because equities have some inherent inflation linking to them and also are the asset class of choice for the long-term investor,” the Jupiter Merlin manager added.
“However, the downside risks to long-only equity investments can be large so this exposure will be managed actively to mitigate market risks depending where we believe we are in the economic and market cycle.”
It also holds other assets when the managers see fit and currently has positions in gold as a defensive hedge and a modest amount in cash.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Since launch in 2013 the four FE Crown-rated, offshore JMF Jupiter Merlin Real Return Portfolio has made a total return of 42.44 per cent, as the above chart shows. It has an ongoing charges figure (OCF) of 1.87 per cent.
A more recently launched onshore version of the fund (with an OCF of 1.53 per cent) – Jupiter Merlin Real Return – has made a loss of 1.84 per cent since July 2018.